The State Bank of Pakistan (SBP) has planned to increase financing through domestic secondary debt markets during the last quarter of the current fiscal year, to cover the budget deficit after encountering a shortfall in foreign financing.
In the latest monetary policy statement issued on March 26, the central bank pointed out, “On the financing side, only Rs48 billion was received from external sources to finance the budget, against the estimate of Rs230 billion,” in the first half of the current fiscal year.
The central bank plans to sell Rs60 billion worth of Pakistan Investment Bonds (PIB) and Rs1,150 billion worth of treasury bills (T-bills) in the final quarter (April to June) of the current fiscal year, according to separate releases issued by SBP on Thursday. It also intends to sell three-year Ijara Sukuk, amounting to Rs45 billion, during this period. In comparison, the targets for sale of PIBs and T-bills were Rs35 billion and Rs980 billion, respectively for the quarter ended March 31.
Auctions for treasury bills will be held every two weeks, between April 6 and June 29, where three-month, six-month and 12-month T-bills will be sold to competitive bidders. Three auctions of PIBs will be conducted in the last quarter of the current fiscal, with targets of Rs20 billion each. The auction for Ijara Sukuk will be held on May 9.
“The government has already borrowed substantial amounts, Rs329 billion between July 1, 2010 and March 12, 2011, through various instruments, increasingly in the three-month treasury bills,” said the policy statement issued previously.
“As long as the central bank has to rely on raising additional financing to cover the budget deficit, interest rates will remain strong,” said InvestCap Head of Research Khurram Shehzad, adding, “Given the current circumstances, it is unlikely that the central bank will cut the discount rate in upcoming monetary policy reviews.”
The government’s increased reliance on domestic sources for budgetary financing, as well as other reasons such as commodity operations, is also creating a shortage of liquidity for the private sector. The announcement of higher targets for the sale of T-bills, PIBs and Ijara Sukuk suggest that efforts to rein in ballooning government borrowing will likely stretch beyond the current fiscal.
Published in The Express Tribune, April 01st, 2011.